The numbers don’t look good. According to Statistics Canada, more than 100,000 Canadians get divorced every year; and 43% of marriages end in divorce before the 50th anniversary.
If you are among that 43%—or if you believe you’re headed there—it makes sense to take some time to learn about the financial implications of a marriage breakdown.
While preparation won’t make the emotional side of divorce any easier, reasoning out how you’ll make key financial decisions in the months ahead will leave both you and your spouse in a better position to move on with your lives.
Every province has its own rules for dividing marital property. And, speaking generally, most jurisdictions assume each spouse contributed financially to the marriage. That means each is entitled to a portion of the marital assets, regardless of who actually paid for them or whose name is on the deed.
However, exactly how much that portion is can be difficult to determine. And sometimes an equitable division of marital assets is not always the same thing as a fair division. It’s also tempting for those entering divorce to be less than transparent about the value of certain assets. But in the end, that wastes time and makes it harder for the lawyers and other professionals you’ll have to work with to reach resolution.
On the surface, a 50/50 split seems logical—and it should be the starting point for discussions. But it’s also easy to imagine scenarios where a “straight down the middle” division doesn’t make sense:
- If one spouse advanced significantly in his or her career while the other stayed home and raised the children. In such a case, one spouse’s future earnings potential is obviously much higher than the other’s.
- If the marriage was short lived, and only one spouse has a pension.
- If one spouse brought substantial assets to the marriage—a gift from a relative, an inheritance, or a legal settlement.
Because division of assets always involves negotiation, it makes sense to know which things fit with your long-term interests. You could, for example, be an aggressive investor who’s comfortable taking over a stock portfolio. Or you could be more conservative, and thus prefer the option of taking the family home.
Dealing with debts
It’s often harder to divide marital debt than it is to divide marital assets. That’s because two people can manage a certain amount of debt, but one or the other of them alone may find it a burden.
Often the most effective solution is to pay off marital debt before filing for divorce. This requires having a candid discussion with your spouse, and agreeing to accept joint responsibility for credit cards, auto loans, and other debts that can be paid off with some effort.
For a lot of couples, this won’t be easy – and spending habits are a major instigator of marriage breakdowns.
If it’s not possible to talk things out, debt will need to be divided during divorce proceedings. In general, only marital debt will be divided in a divorce: that is, debt acquired to establish marital property (the family home; a car; a family-owned business; etc.).
Debt incurred for the exclusive benefit of one spouse (a student loan, for example) typically won’t be split.
Keep in mind creditors will consider both spouses responsible for full payment of joint debts, regardless of any payment agreements they make with each other during the divorce. If you’re concerned your ex-spouse might not live up to his or her obligations, consult a lawyer and have additional protections put into your separation agreement.
Preparing for the future
While even the most amicable divorce leaves emotional scars, some of the financial ones can be minimized. Here are some practical tips to mitigate financial damage for both you and your soon-to-be ex.
Assess your financial situation
Dividing assets is often the most difficult (and contentious) part of divorce. If you can make a thorough inventory of assets—both financial and personal—before you file, you’ll be that much further ahead.
Prepare for financial shock
Many divorcees suffer an income shock as they move from being a two-paycheque to a one-paycheque family. It makes sense to create a personal budget, and eliminate unnecessary or marginal expenses to prepare for your new reality.
Familiarize yourself with the rules
Familiarity with rules and regulations on divorce in your province will help you get through negotiations and asset division.
Review your estate plan
Make sure to update your beneficiary designations and your powers-of-attorney to reflect any changes caused by your divorce.
A final word . . .
No question about it, divorce can be one of the most significant financial challenges you’ll face. But you can make that challenge easier by preventing your emotions from clouding financial decisions.
If at any time you feel that settling scores is taking priority over settling your property, it’s time to take a step back and re-assess your approach. Always remember: breaking up is hard work—getting angry only makes it more so.